German prop trading firm Funded Unicorn has closed down after incurring huge losses, which the company revealed to clients in an email sent on Thursday.
In the statement sent to clients, the prop firm said that the reason it had to shut down was due to the firm’s ‘a-book’ business model.
Unlike the large majority of props, Funded Unicorn claims it would mirror all the trades of clients that passed its challenges and progressed to a funded account.
Most prop firms make money by simply taking challenge fees and paying out ‘funded accounts’ from them.
Funded Unicorn wanted to be more ‘on side’ with its traders and also make it so their business model had more than one stream of income.
Can props do a-book?
The problem with this model is that it is extremely capital intensive, due to the size of the accounts props are offering and the commensurate need to put down large amounts of margin.
At the same time, many prop challenges can do a poor job of actually evaluating a successful long-term trader or the risk in their funded accounts. For example, prop technology firm FPFX has said funded accounts typically last just 22 days.
Combined with the large leverage these accounts have, it means any prop using a live account stands to see huge losses if a trader does actually blow up. All of this was alluded to in the email that the firm sent to clients.
“As you know, all of our Funded Traders were mirrored 1:1 with real company capital,” the company wrote. “This procedure was part of our transparent and fair model. But it was precisely this approach that ultimately brought us to our knees. The resulting losses completely consumed our financial reserves. Overall, Funded Unicorn GmbH suffered a high seven-figure loss – damage that we were no longer able to absorb.
“Our goal was always to grow alongside our traders and, of course, to make money – not exclusively from challenge fees. But in most cases, it was like a curse: Challenge accounts that had traded perfectly for weeks disappeared within two days after being switched to “funded” status, causing us to incur maximum losses on multiple occasions.”
What this points to is a potentially unsolvable problem in the prop model. Traders that pass the challenge are given huge accounts, with the risk that flow creates being extremely difficult to manage.
If prop firms a-book everything, they can end up like Funded Unicorn. But if they also don’t put anything into the real market, they can end up with huge liabilities if a trader makes a large profit.